E25: Russian Invasion and the Markets

Executive Summary

In this episode Tyler breaks down how war has impacted the market since 1940 and what that means for the recent invasion of Ukraine by Russia.

First, we would like to send our thoughts to those impacted by the military action in Eastern Europe and hope for a quick and peaceful solution.

When we explore how the market has been impacted by the war since 1940, what we find is some encouraging news. In every single war around the world since 1940 we find a similar pattern to what we have seen leading up to Russia invading Ukraine. The market has a period of draw down, which is probably because of the extreme uncertainty leading up to the military action. Following the start of the war we see that the S&P 500 is back into positive territory 66.6% of the time just one month later. Furthermore, we see the S&P 500 in positive territory one year later over 80% of the time.

To look at this in context for past wars we can see how quick recoveries took place. Following Pearl Harbor, the market fell 19.8% and took 143 days to hit the bottom, followed by a full recovery in less than a year. The Korean war took 23 days to hit the bottom of 12.9%, full recovery in 82 days. More recent military action shows us similar results, with Iraq’s invasion of Kuwait causing a drawdown of 16.9% and a recovery taking place in 189 days. Finally, when we look at the US Terrorist attacks on 9/11 we see the market taking 11 days to find the bottom of 11.6% and it completely recovering one month later.

While the geo-political situation looks dire and one of the largest oil producing nations in the world has invaded it’s neighbor unprovoked, history shows us that the market tends to bounce back in a relatively short amount of time. This helps us drive home the point that having a long-term investment strategy that lines up with your risk tolerance and risk capacity can help you avoid overreaction when these things take place around the world.

Again, our hearts go out to the Ukrainian people and the atrocities that are taking place in their country.

DISCLAIMER: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. 


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Full Transcript

Tyler Hafford:
Welcome to Financial Discretion Advised, my name’s Tyler Hafford, doing a bit of out-of-schedule podcast here. Want to talk a bit about what’s going on in Europe with the Russian invasion of Ukraine, and how that’s impacting the market, and how investors should be viewing stuff like this, and how it fits into historical context for other military actions.

Tyler Hafford:
At first, I’d like to point out that I’m going to talk a lot about market statistics and recovery times and down draws, and things like that. Don’t want to overshadow the devastation that’s happening in Europe right now, and certainly, our thoughts go out to anyone impacted by what’s happening in Ukraine. Don’t want that to get lost in the numbers I’m about to go through.

Tyler Hafford:
But, want to talk a little bit about what’s going on in the market, and what we’ve seen in other military actions, and the market response throughout history. Especially since 1940, because I think that’s a good span for us to view in the U.S. stock market. But what we’re seeing right now, is that the market is into this correction level. And Jim Bradley and I did a podcast just recently, we talked market corrections. And that’s just a reminder, market falls between 10 and 20% on average. That’s happening in the market every 13 to 16 months, been a little spoiled lately.

Tyler Hafford:
But, when we look at the lifespan of the market, that’s how often we see those. Recovery time on a correction tends to be around three to four months. What we don’t know is, will this become a bear market? And that’s if the market falls below 20%. If that’s the case, that happens on average every three and a half to four years, recovery time around 10 months. We just had one in March 2020. And the NASDAQ recently dipped its toes in into bear market territory. I’d say that the bear market in 2020 was a bit artificial, right? We turned on the economy on and off and saw that drawdown. So, I don’t know if we’d call that a healthy function of the market, but they do happen. This certainly could end up being a bear market. We don’t know that yet.

Tyler Hafford:
But what we do know, is that what spurred the initial sell-off, was the fed coming in saying, “We’re going to raise some rates to control inflation.” The market doesn’t like those tools, especially the speed in which the fed said that they were going to do it, and we saw this initial sell-off. And then we saw this pre-war period before Russia’s invasion of the Ukraine, where it seemed to be we were heading in that direction and the market was responding in this drawdown. That’s not uncommon when we look at military action since 1940. We normally see the market take a bit of a dive there.

Tyler Hafford:
There is something out there, it’s the puzzle for the market. This pre-war period does cause valuations to decrease in stocks. But once that military action happens, we actually see an increase in stock prices, and we actually saw that. So, I’m recording this today on Monday, February 28th. Last Thursday, Russia started their invasion of the Ukraine. The market opened quite low and then saw a surge back into the green territory, followed on Friday by the biggest day in the stock market since 2020.

Tyler Hafford:
Now today’s Monday, some variations going on right now, we’ll have to see where things land. But it’s a strange phenomenon where we do see that reduction in prices, and then a increase once the military action takes place.

Tyler Hafford:
Now, what we can see is since 1940, there’s been a number of military actions across the globe. And how has the market responded to that? Well, when we look since 1940, there’s a military action. The SMP tends to have that downside that I’m talking about. Within one month, the SMP is back into positive territory after those military actions 66.6% of the time, and then if we look one year out from that military action, it’s in positive territory, 80% of the time.

Tyler Hafford:
So, a lot of quick recovery from these geopolitical military actions, and I think what’s happening… And obviously this could be wrong, but my assumption is, there is so much uncertainty leading up to the military action, that the market is selling on, because they don’t know what this is going to look like. They don’t know what the war’s going to look like, they don’t know what economic situation’s going to look like.

Tyler Hafford:
And then once it happens, there’s a little bit more certainty around sanctions and banking industries, and what’s going to happen to financials, those types of things that allow investors to trade based on a little bit more knowledge. And just to talk about how quickly things can recover, we’ll take a look at some military action throughout history where 9/11 happened, 2001 market fell one day drawdown 4.9%. The total drawdown on the SMP through that incident in history was 11.6%. Took us 11 days to hit the bottom, 31 days to have a recovery. So, a little over a month to see a recovery there.

Tyler Hafford:
When we take a look at the Korean war back in 1950, North Korea invades South Korea, drawdown of 5.4%, it was the biggest daily drawdown. Total drawdown on that throughout that period, was negative 12.9% on the SMP, took us 23 days to hit the bottom, 82 days to see a recovery. So, less than three months to see a recovery on that.

Tyler Hafford:
When we take a look at the Iraq invasion of Kuwait, day drawdown 1.1%, total drawdown for that event, 16.9%. Again, bottom took us 71 days to get to, recovery 189 days. So, well below less than that year. The biggest, the longest recovery we had to see was following Pearl Harbor, right? So obviously, in World War II, 1941 biggest drawdown day on Pearl Harbor’s, negative 3.8%. Total drawdown on the market, down 19.8%. Took us 143 days to hit the bottom of that market, drawdown 307 days. So, less than a year to see that recovery. Actually, when we look at the start of World War II, until it ended… So, 1939 and 1945, the DOW was actually up a total of 50%, more than 7% a year through that period.

Tyler Hafford:
And when we look at the two worst wars in modern history, the US stock market was up a combined 115% through that period of time. So, all of these statistics are not to say that this might be different. This could certainly be a different impact, and I think a lot of what goes on in the energy market is going to dictate a lot of market movement. But what we see historically, is that these military and geopolitical actions actually see a pretty quick recovery.

Tyler Hafford:
And the reason why I bring that up for investors is, while this uncertainty of rates and inflation and geopolitical action out there, all seem a bit daunting and can be worrisome when we’re taking a look at the market, when we put it in historical contexts and look at, “All right, how often does the market fall this much? How quickly does it recover? What happens if there is war in different parts of the world?” We can understand what the recoveries look like and be better investors because of it.

Tyler Hafford:
So, if you are working right now and continuously putting money into a 401k or into your investments, you’re buying in at cheaper valuations right now. Well, will the market fall any further? That’s yet to be seen, but we do know right now is that the market’s at a bit of a discount about 12 to 14%, depending on what index we’re looking at. And, we have room to let this come back, and historically it has. Every correction and bear market in US history has recovered. We’re a 100%. We just got to give it the time to do so, and that’ll be the case here. And, my statistics are just trying to give us a frame of mind of how quickly that process can happen.

Tyler Hafford:
Now, if you were drawing money out in retirement, obviously these drawdowns can be worrisome. So, if you have the ability to mute your withdrawals, or not take out a big chunk to handle one-off purchases right now, that might be a good idea. Let the market recover to allow you to do so. But, the recovery has always come, and I think the big thing as investors, is to trust in the US stock market, what we’ve seen in history, what we’ve seen in past military actions around the world and how that’s impact the market, and trust that the recovery is going to come, and we can be better investors because of it.

Tyler Hafford:
So, bit of a ad hoc podcast here, just wanted to talk around what’s going on in the market. What we can expect, what we’ve seen historically. Please, if you have any questions, leave them below. I would be happy to dive into anything more. My email’s on our website, Penobscotfa.com. We’ll keep our fingers crossed that the market does reverse course and things in Europe improve. Again, our thoughts go out to anyone impacted by the tragedy that’s happening there right now. Please like, share, check out our webpage and other videos here on our YouTube channel. Thanks, guys.

Speaker 2:
The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein, is for informational purposes only, and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecast provided herein, will prove to be correct. Thank you.